• Mapletree North Asia Commercial Trust's 2Q/1HFY19 DPU of 1.926/3.807 Scts was in line, at 25%/50% of our FY3/19F forecast.
• In 2QFY19, there was positive rental reversion across all properties, in particular at Festival Walk (FW) that saw the renewal of an anchor tenant.
• Maintain ADD with a slightly lower Target Price of S$1.28.

2Q/1HFY19 Results Highlights

• Mapletree North Asia Commercial Trust reported 2QFY19 DPU of 1.926 Scts, +3.1% y-o-y. This was achieved on the back of a 16% rise in distribution income thanks to a full quarter's earnings contribution from Japan properties (acquired in May 2018) and organic improvement at its existing assets.
• Portfolio occupancy was unchanged q-o-q at 99.6% in 2QFY19 as the normalised take-up of 98.7% at Gateway Plaza (GW) was offset by full occupancy at Sandhill Plaza (SP).
• Results were in line, with 2Q/1HFY19 DPU accounting for 25%/50% our FY19F forecast.

Strong Positive Rental Reversion at Festival Walk

• Festival Walk delivered a 1.4% y-o-y rise in 1HFY19 revenue, with positive retail rental reversion (including an anchor tenant renewal) of 40% and a 15% uplift in office rental reversions. Festival Walk notched an 8.9% rise in tenant sales in 1HFY19, with a 2.7% increase in shopper traffic. 
• Excluding forex effects, management guided a 4.5% increase in revenue (local currency) in 1HFY19. We estimate 6.9% of portfolio expiries in 2HFY19F and 15.8% in FY20F will come from Festival Walk. We anticipate continued positive reversion, given rising retail sales in HK.

Income Boost from Japan and China Properties

• In addition to a full quarter’s income from the newly-acquired Japan properties, Gateway Plaza and Sandhill Plaza also benefited from higher rental reversion of 8%/15% in 1H. Based on our estimates, another 2.2% and 8.6% of portfolio income (ex-HK properties) are due to be renewed in FY19-21F.
• We remain positive on Sandhill Plaza renewals, given the office decentralisation trend in Shanghai and we expect Gateway Plaza to be stable, given the more volatile macro outlook. Japan will continue to benefit from marking-to-market rents at selected properties, in our view.

Robust Balance Sheet

• Gearing stood at 39% at end-2QFY19, while average debt maturity has lengthened marginally q-o-q from 3.43 years to 3.96 years.
• Blended cost of funds rose marginally to 2.48% at end-2QFY19, while 78% of its debt are on fixed rates. Assuming a target gearing of 42%, we think the trust has debt headroom for potential acquisitions.

Maintain ADD

• We keep our FY19-21F DPU but adjust DDM-based Target Price down to S$1.28 for a higher cost of equity assumption of 8.55% (8.50% previously).
• We estimate 80% of its FY19F income has been hedged into S$.
• We still like Mapletree North Asia Commercial Trust for its resilient portfolio with growth potential.
• Risks: escalating trade tension that could cause slowdown in economic growth and higher interest rates.